Thoman v. Mills

124 N.W. 33, 159 Mich. 402, 1909 Mich. LEXIS 858

• Court: Michigan Supreme Court
• Decided: December 31, 1909
• Docket: Docket No. 13
• Status: Published

Opinions

Moore, J.

This proceeding was commenced in April, 1905. The bill of complaint is filed to compel the defendants to account, as for a trust fund, for the assets and property of the Lansing, St. Johns & St. Louis Railway Company, which, it is claimed by complainants, they have attempted to secure for themselves, as officers and directors, and for all profits which accrued to the defendants by reason of their use of the property. The complainants were stockholders in the Lansing, St. Johns & St. Louis Railway Company, and it is claimed that their equitable rights in the property owned by that company have never been cut off by any proceeding authorized by law. ,

The important portions of the prayer for relief read:

“ That the aforesaid Myron W. Mills and David Mills, executors of the estate of Nelson Mills, the said Myron W. Mills, James R. Elliott, and David Mills, and the said Lansing & Suburban Traction Company may be by the court required to account to your orators for the due value and proportion of the interest of your orators in the property as hereinbefore described of the said Lansing, St. Johns & St. Louis Railway Company, and for the profits, advantages, and benefits obtained as herein alleged.”

The case was heard in open court. The circuit judge said (we quote from his opinion):

“ I am satisfied that the defendants must account for the value of the stock held by the complainants in the Lansing, St. Johns & St. Louis Railway Company as of the date it was converted by way of resolution transferring the assets of that company to the defendants’ company, the Lansing & Suburban Traction Co. Creditors of a corporation must proceed to have their claims satisfied in the usual way, and, if they occupy the dual position of creditors and majority stockholders, they must yet observe the rights of the minority stockholders when taking measures to satisfy their claims as creditors. The way adopted may have been a short cut to the inevitable result; but the law does not recognize such short cuts when it deprives any one interested of the right to have due process of law observed. I am not certain whether complainants are entitled to substantial damages, and the question of the amount, if any, they should recover from defendants, is left open for further argument by counsel and further determination by the court. The defendants, having received the assets of the Lansing, St. Johns & St. Louis Railway Company on the 8d day of March, 1904, must account for the value of the stock of the complainants in that company as of that day. * * * I say this now, to indicate that upon the reargument of the question of damages the stock held by complainants will be treated as converted on the 3d day of March, 1904, and the court will fix its value as of that day, and not follow it into other companies, and the question will have to be considered the same as any other conversion of specific property.”

After the reargument the circuit judge expressed himself as'follows:

“ This court in an opinion filed February 21,1907, held defendant guilty of the conversion of the complainants’ stock in the Lansing, St. Johns & St. Louis Railway Company as of March 3d, 1904, and the matter now for'determination is the value of such stock on that date. To make this determination requires a consideration of the condition of the company on that date, what it had by way of tangible property and prospects capable of being depended upon, and what its obligations amounted to, and its ability to meet the same then or at any future date.

“ Complainants insist the court, in determining the value of their stock, should consider the use made of the assets of the company by the defendants. An objection to this way of figuring value for complainants lies in the fact that the assets in defendants’ hands could be used untrammeled by the indebtedness they were subject to, in the use the company could make of them. In the hands of the company, its property and prospects were so loaded down with its obligations that no substantial value can be placed upon them. They were worth, if anything at all over and above the obligations, only the amount that, under the most favorable circumstances, might have been realized out of their management by the company. The Lansing, St. Johns & St. Louis Railway Company had no funds, or any way to obtain funds. Its property was mortgaged for $500,000 for the construction of the road. It owed nearly $100,000 besides to the contractors for construction, and it owed other debts. Its contract for the construction of the road compelled it for lack of funds to practically give everything to the contractors. It could not meet its obligations. The bonus subscriptions fell flat. Its treasury was empty, and it is safe to say that no one could have been found willing to pay its obligations for all its property and prospects.

“ Complainants had put in the venture in money about $300 each, and for that and their time and efforts had each received stock in the company of the par value of $7,300. I very much doubt, had there been an assessment of $50 on their holdings in February, 1904, whether either one of them would have put that sum into the venture, for, had the mortgage securing the bonds held by the contractors been foreclosed, the contractors would have had to bid the property in, for no bid could have been expected large enough to have paid the contract obligation. The best way I know to determine what the defendants took belonging to complainants is to determine what the complainants had of value in the company on the 3d day of March, 1904. These complainants, together with Frank L. Dodge, filed a bill of complaint against the Lansing, St. Johns & St. Louis Railway Company in March, 1902, asking this court to permit them to withhold the subscription stock from the company, on the ground, among others, that the company was insolvent. The company in its answer denied its insolvency. It was not necessary in that case to decide whether the company was solvent or insolvent; but the position then assumed by these complainants militates against them now upon the question of the value of their holdings in that company.

“Frank L. Dodge sued the purchasers of the Lansing, St. Johns & St. Louis Railway Company in this court for the debt due him from the latter company for services performed by him for it, and these complainants were witnesses for him in that case, and it is a grave question whether they are not now estopped from claiming there was no sale to the Lansing & Suburban Traction Company, for Mr. Dodge’s suit was upon the theory that there was a sale, and therefore an assumption of the debts of the Lansing, St. Johns & St. Louis Railway Company.

“Having in mind what it owed, its prospects and condition, I am unable to say the stock of the Lansing, St. Johns & St. Louis Railway Company was of any substantial value the day defendants converted the same. I quite agree with the counsel upon the rule that, when it cannot be determined with certainty just the extent of damage arising from a conversion, the court should see the innocent saved from loss; but this case does not fall within such rule, for the reason that, before the rule can be invoked, some substantial damage must appear. The defendants being guilty, however, of the conversion of complainants’ stock in the company, and the damages of the complainants being only nominal, the decree will fix the damages at six cents, and no costs will be awarded either party.”

The complainants appealed from the decree in the lower court. The defendants did not appeal. The oral arguments and the briefs of counsel indicate a good deal of bitterness toward each other on the part of the litigants, who say very hard things of each other. "We shall endeavor to make no further reference to that feature of the case.

The first Lansing, St. Johns & St. Louis Railway Company was organized in 1897. Its capital stock was $250,000. Of this stock each of the complainants had 36 shares, of the par value of $100 a share. This company proposed to build a line of electric road from Lansing to St. Johns, and then to St. Louis in this State. It succeeded in securing certain franchises and rights of way and attempted to get some one to construct the line, in April,’ 1900, another company of the same name was organized with a capital stock of $500,000. .Each of the complainants had 72 shares of stock in this company, which they received in exchange for the stock in the former company. Each of the complainants was a director in both of these companies. In January, 1901, for the purpose of paying a debt of the company of $140, each of the seven directors of the company paid in $20 in cash, and each received therefor one share of stock. Shortly after the second company was formed, the work of construction was entered upon by Messrs. Mills, Percival, and Norris, who had a contract with the company, the details of which it is not necessary to relate here, further than to say they were given $500,000 in bonds of the company, secured by mortgage, and $300,000 of its capital stock. At the same time the two complainants placed their written resignations as directors in the hands of Mr. Mills to take effect at any time that he might designate. Later the resignations were accepted and new directors elected in the place of complainants.

In 1902 the litigation arose to which reference was made by the circuit judge in his opinion. Before the sale was made which gave rise to the present litigation, nearly $400,000 had been put into the enterprise by John E. Mills through the assistance of his father, Nelson Mills. The complainants did some work in securing bonuses and right of way. Their cash contribution did not exceed $320 each. It was expected to run the road as an electric road by a method which was in an experimental stage and did not prove to be a success. The road was never built farther than St. Johns. The contractors were not paid according to the terms of their contract. The sums secured in the way of bonuses were small. The affairs of the company were in a bad way. The stock standing in the name of John E. Mills was, by unanimous vote of the directors, after the death of John E. Mills, transferred to Nelson Mills, as was all the unissued stock. This was done because of reasons that were stated in detail in the resolutions, which reasons were proper ones. In March, 1904, a stockholders’ meeting was held. Defendants claim due notice was given of this meeting. Complainants claim they had no legal notice of if. Upwards of 4,000 shares of the 5,000 shares of the capital stock were represented. At this meeting it was voted to transfer the Lansing, St. Johns & St. Louis Railway Company to the Lansing & Suburban Traction Company, if the latter company would assume the debts and liabilities of the former company. This was soon thereafter done. The complainants within a day or two learned of what was done. Later, in March, the action of the stockholders was ratified by the board of directors; but one of them voting against it. The Lansing & Suburban Traction Company also acquired by purchase the Lansing City Electric Railway Company, paying therefor $65,000, and assuming debts amounting to $100,000 or upwards. Later the Lansing & Suburban Traction Company, with many other properties in the central part of the State, became the property of the Michigan United Railways Company. There is nothing in the record to indicate a want of good faith in the sale of the company in which complainants were stockholders; but it is insisted by complainants there was a lack of good faith, and further that, even if there was not, as the forms of law were not followed, a constructive fraud was perpetrated upon them.

We quote from the brief of counsel:

“By becoming officers and directors of the Lansing, St. Johns & St. Louis Railway Company, the defendants became trustees for the benefit of all the stockholders interested in that company. As majority stockholders in the Lansing, St. Johns & St. Louis Railway Company, the defendants also owed a duty to the complainants as the minority stockholders to manage the affairs of the concern for the best interests and profit of all the stockholders.

“ ‘ The directors of a corporation are ordinarily invested with the most extensive powers of management. They are empowered to represent the company in all its business transactions and ventures; and the entire corporate affairs are placed in their charge, upon the trust and confidence that they shall be cared for and managed for the common benefit of the shareholders, and in accordance with the provisions of the charter agreement. It is manifest therefore that the directors of the corporation occupy a position of the highest trust and confidence, and that the utmost good faith is required in the exercise of the powers conferred upon them.’ 1 Morawetz on Private Corporations (2d Ed.), § 516.

“ Directors occupy the position of trustees towards the stockholders. 2 Cook on Corporations (4th Ed.), p. 1262, § 648, note 3. And it has been frequently held that, even though the directors may be acting in good faith in transferring the property of the corporation to themselves, the transaction is fraudulent in law. It was held in the case of Ervin v. Navigation Co., 27 Fed. 625, that the rights of stockholders could not be thus cut off, where a majority of the stockholders attempted to transfer all its assets to another company of which they were owners.

“ ‘Among the disabilities imposed by courts of equity upon those who occupy fiduciary relations towards others, respecting property which is to be administered for beneficiaries is that which precludes the fiduciary from purchasing the property on his own account.’ Ervin v. Navigation Co., 27 Fed. 625.

“ ‘Aside from the want of legal power already referred to, a court of equity will not permit the directors of a corporation, who are not only trustees for the stockholders of the corporation, but for its creditors as well, to thus dispose of the corporate property to themselves, or for their individual benefit. However in fact intended, equity treats such transactions as fraudulent because it operates as fraud upon cestuis que trustent.’ Farmers’ Loan & Trust Co. v. San Diego St. Car Co., 45 Fed. 527.

“ 2 Cook on Corporations (4th Ed.), p. 1288, § 653; Goddard v. Importing Co., 9 Colo. App. 306 (48 Pac. 279); Fishel v. Goddard, 30 Colo. 147 (69 Pac. 607); Eaton on Equity, p. 430, § 205; 1 Beach on Trusts & Trustees, p. 207, § 100; Hindman v. O’Connor, 54 Ark. 627 (16 S. W. 1052, 13 L. R. A. 492, and note) ” — citing, also, Smith v. Smith, Sturgeon & Co., 125 Mich. 234 (84 N. W. 144); Sparrow v. E. Bement & Sons, 142 Mich. 441 (105 N. W. 881, 10 L. R. A. [N. S.] 725).

It is their further claim that the circuit judge was wrong in giving them only nominal damages. They assert that defendants made large sums of money as the result of their conduct. We do not think the questions of law are troublesome, in view of the record as we find it. It will be observed that the complainants do not pray in their bill to be allowed stock in the Lansing & Suburban Traction Company, in lieu of their stock in the former company. A reference to the prayer for relief already quoted will show that complainants seek to recover the value the property of the Lansing, St. Johns & St. Louis Company has been to the Lansing & Suburban Traction Company and to the individuals named as defendants who are stockholders in that company. Counsel for complainants make a computation of values based upon the relations of the Lansing & Suburban Company and two of the stockholders in the prior company and also based upon an entry appearing in- the books of the Lansing & Suburban Company which it is said is an admission of values, though the person who made the entry testified it was a mere matter of bookkeeping and was not based at all upon actual values. A careful examination of the record compels the conclusion that the computation is too chimerical to be accepted as a basis for a decree in favor of the complainants.

The record does not leave the question of values in the field of conjecture. It discloses that in March, 1904, the affairs of the Lansing, St. Johns & St. Louis Company had reached an acute stage. The original purpose to operate the road as an electric road had proven a dismal failure. The receipts from bonuses were very small. The road had no arrangement by which its cars could run into the city of Lansing. Its dummy train was drawn by a steam locomotive. The entire receipts of the road from the beginning of running its cars until March, 1904, a period of 26 months, were less than $8,000. This did not take any account of the interest charge on its debts, which was in excess of $50,000. The company was hopelessly in debt, and the debts constantly increasing, with no relief in sight. Unless conditions soon changed for the better, it could not continue as a going concern. Mr. Mills had invested about $400,000 in money in the undertaking. If he had resorted to the courts to enforce his claim, the road would not have sold for enough to pay it, and the stockholders would have received nothing. We have already recited what was done. There was a failure to literally comply with the law in making the sale; but it was made for an adequate consideration, and for the full value of the property. If all the formalities of the law had been followed, the result would have been the same, and the stockholders would have no reason to complain. The road at this time was insolvent, and the stock was worthless. After the road was sold and the Lansing & Suburban Traction Company had also taken over the Lansing city lines, the Suburban Traction Company was able to borrow, with the aid of Mr. Mills’ indorsement— Mr. Mills was regarded as a very wealthy man — about $400,000. This money was expended in betterments, and the cars were run into the city of Lansing. The gross earnings of the two lines were kept separate, and, while they were operated as an entity, it is not difficult to determine from the record what charge should be made against the St. Johns line as its just share of the cost of operation. These figures show that from the time the sale was made up to the time when the proofs were closed, the net earnings of the line at no time reached the sum of $10,000 a year. This was exclusive of the charge for interest on the debts and some other proper charges. The debts assumed by the Lansing & Suburban Traction Company, as the consideration for the purchase, were in excess of $600,000. The interest charge, of course, would be in excess of $30,000. Not only does the record fail to show that defendants have profited by failing to literally follow the law in making the sale and in taking over the property, but it shows affirmatively that at no time has the property taken possessed any value in excess of its just liabilities.

The cases cited by counsel for complainants have been examined. A reference to them will show that they are easily distinguishable from the case under consideration. It is not believed a case can be found where relief was granted to a stockholder in a prior corporation which was sold to a later corporation under the circumstances disclosed by this record.

The decree is affirmed, with costs.

Blair, C. J., and'GRANT, Hooker, and Brooke, JJ., concurred with Moore, J.